Microsoft on Monday laid out a path to the cloud for its Dynamics ERP at Convergence 2012 conference in Houston. More than 10,000 attendees listened to a keynote address from Kirill Tatarinov, president of Microsoft Business Solutions, that outlined the company's plans to innovate around Dynamics.

Microsoft announced Microsoft Dynamics NAV 2013 and Microsoft Dynamics GP 2013 will be cloud-enabled for Windows Azure, optimized for small- and mid-size businesses, and generally available in the fourth quarter of this year. The company also reiterated its commitment that the next major release of Microsoft Dynamics AX will evolve as an enterprise cloud service offering from Microsoft.

Mike Ehrenberg, CTO for Microsoft Business Solutions and a Microsoft Technical Fellow, noted that small- and mid-market companies make up the biggest section of early cloud adopters. Microsoft expects that trend to continue.

Starting with Small Businesses

"These companies have sought cloud services because they allow them to scale back on their in-house IT, which is often not a strategic strength of theirs. They tell us consistently how much they value their Microsoft Dynamics partners -- depending on them to develop, deploy and evolve their business systems," Ehrenberg wrote on the Official Microsoft Blog.

"The cloud doesn't change this, and while cloud delivery will simplify some of the routine tasks of system deployment, it is key to our strategy that our partners remain an essential part of the solution. Our partner ecosystem plays a critical role in delivering cloud services designed explicitly to meet each customer's unique needs."

Over time, he added, Microsoft will also add to its current portfolio of cloud services targeted at the upper mid-market and enterprise consumers. All Microsoft Dynamics cloud offerings provide native interoperability with other Microsoft products and services.

Microsoft's Cloud Puzzle

Although Google and Amazon are perhaps better known for cloud services, Microsoft is no stranger to the cloud. In fact, Microsoft builds and operates some of the largest cloud services at scale, from Bing to Hotmail to Xbox LIVE.

Of course, the revenue model for a cloud service is substantially different than it is for a packaged software service. Often, customers expect these products to be far cheaper. However, there is room for creativity, said Rob Enderle, principal analyst at the Enderle Group.

"As the market has matured, software vendors have discovered that the services they wrap around the product and the subscriptions they sell can provide an annuity that's as strong or stronger than the point revenue they got from selling a particular package of software," Enderle said.

Microsoft -- along with many other software makers -- is beginning to understand the dynamics of the cloud shift from a revenue perspective, Enderle said. It took awhile, he said, for Microsoft to figure out how to make the shift toward the cloud without cannibalizing its packaged-software revenue.

"Microsoft can't allow Google or IBM or anybody else to emerge unchallenged as the cloud provider. Microsoft is the largest seller of software and if they suddenly appear to be a buggy maker in an automobile world they are done," Enderle said. "So they are making sure folks know that they are as capable of performing in this new market as they were in the old one. I think they are making a credible argument."